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Foreign Direct

Investment on Indian
Economic growth &
development
Submitted by:

Kunwar Julka(wang jiu zhou)

ID:-I201621218
ABSTRACT
Foreign direct investment (FDI) plays an important role in Indian economic growth dynamics.
There are several examples of the benefits of FDI in India. FDI in the retail sector can expand
markets by reducing transaction and transformation costs of business through adoption of
advanced supply chain and benefit to the consumers and suppliers (farmers). The result is also
net gains in employment at the aggregate level. Author has been given forth a few conceptual
issues and analysis of qualitative information, data and stylized facts. Author takes following
methods - Foreign direct investment in India, surveys retail sector growth forecasts in India,
highlights components raised by opponents of liberalising FDI in retail trade, provides arguments
in favour of allowing foreign competition in this sector, and outlines challenges for organised
retail in India.
Introduction
India is now the last major frontier for globalise retail. In the 21years since the economic
liberalisation of 1991, Indias middle class has greatly expanded and so has its purchasing
power. But over the years, unlike other major emerging economies, India has been slow to
open its retail sector to foreign investment. Recent signals from the government however
suggest that this may be about to change global supermarket chain stores such as Wal-Mart
(United States), Carrefour (France), Marks and Spencer and Tesco (UK) and Shoprite (South
Africa) may finally be allowed to set up shop in India. Foreign direct investment (FDI) in the
retail sector in India is restricted in 2006, the government eased retail policy for the first time,
allowing up to 51 Percent FDI through the single-brand retail route (see Section 2 for a
classification of organised retail in India). Since then, there has been a steady increase in FDI
in the retail sector, and the cumulative FDI in single-brand retail stood at $195 million by the
middle of 2010 (DIPP Report, 2010) Foreign investment in the single-brand retail sector in
India has been resilient to the global economic crisis of 200708. Given Indias large
population and rapidly expanding middle class, there is robust and growing demand to
rapidly expanding market. Table 1 shows the growth in private consumption and
expenditures across categories to highlight this trend. In the past few decades, large retailers
have experienced substantial growth around the world. Table 2 show the average per cent of
the retail sector in total employment over the given time period.
OBJECTIVES OF THE STUDY
The present study has been undertaken with a conduct empirical analysis of impact of FDI
in India growth and made some recommendation to flow of FDI in retail sector. Thus the
objectives of the study can be enumerated as follows:

a) To analyze the pattern and direction of FDI flow in India.


b) To review FDI policy of India
c) To make policy recommendation to improve the level of FDI.
d) Retail sector growth forecasts in India
e) Highlights liberalising FDI in retail trade and point out its positive and negative effect
on retail sector.
Surveys retail sector growth forecasts in India

The retail sector in India is organised into three categories. According to the Department of
Industrial Policy and Promotion (DIPP) of the Government of India, single-brand retail
comprises those retailers selling products of a single Brand only, such that products
should be sold under the same brand internationally. Single-brand product retailing covers
only products that are branded during manufacturing. In this category, FDI is allowed to the
extent of 51 Percent from 2006 to March 2010, around 94 foreign firms applied to invest
through the single-brand route of which 57 were approved. Consequently, the percentage
increase in FDI flows in the retail sector between 2008 and 2010 was even higher than that in
sectors such as the services sector, trading and telecommunications which have a much
higher share in the countrys overall FDI (DIPP Report, 2010). In contrast, no FDI is allowed
in the multi-brand retail category. This includes all firms in organised retail that seek to stock
and sell multiple brands, such as large international retailers like Wal-Mart and Carrefour.
This is the sector that is most under dispute. The third segment, called cash and carry, refers
to wholesale retail. The government defines this segment as the sale of goods and
merchandise to retailers, industrial, commercial, institutional or other professional business
users or to other wholesalers and related subordinated service providers. In India, FDI of 100
per cent is permitted in this segment. As per the cash-and-carry structure commonly in
India, the wholesale and retail entities are maintained as separate entities without any cross-
shareholdings. The retail entity is owned and controlled by the Indian partner while the
wholesale entity can be owned by the foreign partner up to 100 per cent. Wal-Mart, for
example, has already established a successful presence in this category of wholesale
operations by entering into a joint venture with Bharti Enterprises Ltd. of India. The new
entity, Bharti-Wal-Mart, is in operation with stores opening around the country. The
yardstick used to determine whether an operation is wholesale or not is the type of customers
to whom the sale is made and not the size and volume of sales.

The data from private consulting company reports suggest that growth in the Retail market
has been rapid despite major restrictions on FDI. In the third-quarter report of 2010, the BMI
India Retail Report forecasts that the total retail Sales will grow from USD353 billion in
2010 to USD543.2 billion by 2014.1 An important consideration, the report suggests, is the
fast-growing middle and Upper class consumer base the analysis also suggests that in the
next few years, there will be major opportunities in Indias smaller cities. AT Kearney, a
global management consulting firm, rates India as the most attractive nation for retail
investment.
Highlights concerns raised by opponents of liberalising FDI in retail
trade

A third concern raised by domestic incumbent firms in the organised retail sector is an infant
industry argument that this sector is under-developed and in a nascent stage. In this view, it is
important that the domestic retail sector grow and consolidate first, before being exposed to
foreign investors. Domestic firms in this sector oppose liberalising retail to FDI as they view
multinational companies as direct competitors. A newspaper article describes opposition
from an incumbent: Kishore Biyani (chief executive of the largest retailer in India) argues
that the retail sector should not be given away to foreign players while it is too young to
compete on a level playing field. He lacks the capital to build even average-sized Wal-Mart
stores of 200,000 square feetfour times larger than his flagship Big Bazaar (India Daily,
2005). In the Indian policy debate, a contrasting view is that growth in organised retail is
expected to benefit producers, without (significantly) hurting smaller traders, and that they
may preserve their smaller domains without being swallowed up by large retailers. However,
the experience of organised retail in other parts of the world does not always bear this out.
With respect to the impact of entry by big-box stores such as Wal-Mart on retail employment
and earnings evidence from the United States is mixed. Using county-level data, a recent
study finds that Wal-Mart entry increases retail employment in the year of entry (Basker,
2005) while contrasting evidence indicates that each Wal-Mart worker replaces
approximately 1.4 retail workers representing a 2.7 per cent reduction in average retail
employment (Neumark 2010).

TABLE 1

Growth Rates in Private Final Consumption Expenditure: 200812 (%) in Constant Prices

Category 201011 (%) 201112 (%) 201213 (%) 201415 (%)


------------------------------------------------------------------------------------------------
Food and beverages 11.7 11.1 13.0 10.4
Clothing and footwear 18.0 25.0 7.7 5.2
Rent, fuel and power 10.5 12.5 14.2 16.6
Furniture and appliances17.7 22.2 19.4 9.4
Medical care 10.1 10.1 10.1 10.1
Transport and comm. 10.6 14.1 9.3 16.5
Recreation, education 12.3 12.9 18.3 13.3
and culture
Miscellaneous goods 12.9 27.1 29.7 29.0
and services
Total Pvt. Consumption 12.0 14.8 14.1 14.2
expenditure
Estimated retail 12.4 14.9 15.1 12.5
trade sales
(I) Retail trade sales exclude expenditures on rent, fuel and power; transport and
communication; recreation, education and cultural activities; and expenditures on food in
hotels and restaurants.
Source: Department of Industrial Policy and Promotion discussion paper, authors
calculations
BENEFITS OF FDI AND COMPETITION IN ORGANISED RETAIL IN
INDIA
The changing structure and scale of retail can critically impact several industries in the short
term the retail industry itself, manufacturing, and real-estate, to name a few. And in the
long term, spill-over effects can be felt in other industries. The growth of retailing has the
potential to impact the performance of interlinked sectors such as manufacturing of consumer
goods and agriculture- based industries. We begin by discussing the potential benefits of
allowing entry by large foreign discount retail chains on lowering inflation, improving
distribution and warehousing technologies. We do so by comparing findings from US studies
that examine the effects of Wal-Mart and other large chains entering the US retail sector and
the upheaval in the retail landscape brought about in the United States beginning in the early
1990s. The section concludes by describing a couple of policy recommendations made in the
Indian Governments recent discussion paper on opening up the retail sector with a view to
protecting domestic firms and increasing employment in the retail sector.

a. Lowering Inflation and Food Prices:- Evidence from the United States suggests that FDI
in organised retail could help tackle inflation, particularly with wholesale prices. Inflation is
a politically sensitive subject, particularly for incumbent governments in a democratic
country such as India, in particular because rising food prices tend to be regressive in their
impact. This is underscored by the fact that the weight of food in rural and agricultural
household consumption baskets is approximately 6570 percent. Recent studies quantify the
price impact of entry by low cost entrants. For example, using average city-level prices of
various consumer goods, price dynamics in 165 US cities before and after Wal-Mart entry
suggest robust reduction in prices for several products while magnitudes vary by product and
specification, but generally range from 1.5 to 3 percent in the short run to four times as much
in the long run with significant increases in consumer surplus especially for lower income
households Taking into account demographics, store characteristics and market conditions,
corroborating evidence suggests that Wal-Mart decreases prices by 67 per cent for national
brand goods and by 38 per cent for private label goods. Price decreases are most significant
in the dry grocery and dairy departments. Moreover, Wal-Mart sets grocery prices
significantly lower than its competitors would lead to a continuously updated expenditure
weighted average price calculation in comparison with the official Bureau of Labour
Statistics approach. Estimates using their new approach would lower food at home inflation
by about 0.320.42 percentage points, in turn lowering the estimated inflation rate by about
15 per cent per year. In India, food accounts for nearly 50 percent of the consumption basket
and the impact on inflation reduction could therefore be significant.

b. Improving distribution and Warehousing. It is expected that technical know-how from


foreign firms, such as warehousing technologies and distribution systems, for example, will
lend itself to improving the supply chain in India, especially for agricultural produce. Here,
there are multiple inefficiencies in the supply chain that leads from farm to the dinner table.
While the Indian government is the largest purchaser of food crops for many farmers, the
consequence of a poor distribution system is that much of the stockpile fails to reach
consumers and ends up rotting or as waste. India is the worlds second largest producer of
fruits and vegetables in the world after China, producing around 180 million tonnes per year.
Official estimates are that about 2530 per cent of this produce goes waste between harvest
and consumption. Encouraging wholesale trading can create demand throughout the supply
chain. In this spirit, the recent discussion paper talks of earmarking 50 percent of FDI inflows
for building up of back-end infrastructure, logistics and agro-processing (DIPP Report,
2010). In theory, if fresh produce is collected efficiently at the farm-gate, and end-to-end
cold-chain is maintained in storage and transportation until it reaches supermarket shelves as
in developed countries, this wastage can be eliminated, translating into better prices for
farmers and lower prices for consumers besides greater availability of the produce for
processing, export and other value addition.
c. Employment Effects and Small Domestic Firms:- The Indian Government recommends
that retail firms source a percentage of manufactured products from the small and medium
domestic enterprises (DIPP Report, 2010). With a restriction of this sort, the opening up of
the retail sector to FDI could therefore provide a boost to small and medium enterprises.
Moreover, expansion in the retail sector could also generate significant employment
potential, especially among rural and semi-urban youth. The discussion paper considers the
possibility of reserving 50 per cent of jobs in FDI-funded retail outlets for rural youth. Other
issues up for debate include identifying possible locations for such outlets. The current
thinking is that these stores could initially be allowed in cities with populations of over one
million, particularly on the outskirts.

TABLE 2
Employment Shares in Retail Trade, 20042015
Rural Urban
Men Woman Man Man Woman

20112012 5.6 1.7 18.8 8.6


20012002 3.63 1.4 14.6 6.66

Note:- (i) Each cell has the average per cent of the retail sector in total employment over the
given time period.
Source: Authors calculations based on data from Department of Industrial Policy and
Promotion report 2011 Blackwell Publishing Ltd.
CHALLENGES FOR FOREIGN FIRMS IN ORGANISED RETAIL
The first challenge is competition from the unorganised sector. Traditional retailing has been
established in India for many centuries and is characterised by small, family-owned operations.
Because of this, such businesses are usually very low-margin, are owner-operated and have
mostly negligible real estate and labour costs. Moreover, they also pay little by way of taxes.
Consumer familiarity that runs from generation to generation is one big advantage for the
traditional retailing sector. It is often said that the mom-and-pop store in India is more like a
father-and-son enterprise. Such small shops develop strong networks with local neighbourhoods.
The informal system of credit adds to their attractiveness, with many houses running up a tab
with their neighbourhood kirana store, paying it off every fortnight or month. Moreover, low
labour costs also allow shops to employ delivery boys, such that consumers may order their
grocery list directly on the phone. These advantages are significant, though hard to quantify. In
contrast, players in the organised sector have to cover big fixed costs and yet have to keep prices
low enough to be able to compete with the traditional sector. Getting customers to switch their
purchasing away from small neighbourhood shops and towards large-scale retailers may be a
major challenge. The experience of large Indian retailers such as Big Bazaar shows that it is
indeed possible. Anecdotal evidence of consumers who return from such shops suggests that the
wholesale model provides for major bargains something Indian consumers are always on the
lookout for. The other major challenge for retailers in India, as opposed to the US, is the storage
set-up of households. For the large-scale retail model to work, consumers visit such large stores
and return with supplies likely to last them for a few weeks.
CONCLUSION
Indias retail sector remains off-limits to large international chains especially in multi-brand
retailing. A number of concerns have been raised about opening up the retail sector to FDI in
India. The first concern is the potential impact of large foreign firms on employment in the
retail sector. A second related concern raised in the DIPP report is that opening up FDI
would lead to unfair competition and ultimately result in large-scale exit of incumbent
domestic retailers, especially the small family-owned business. A third concern raised by
domestic incumbent firms in the organised retail sector is that this sector is under-developed
and in a nascent stage. In this paper, we argue that the potential benefits from allowing large
retailers to enter the Indian retail market may outweigh the costs. Evidence from the United
States suggests that FDI in organised retail could help tackle inflation, particularly with
wholesale prices. It is also expected that technical know-how from foreign firms, such as
warehousing technologies and distribution systems, for example, will lend itself to improving
the supply chain in India, especially for agricultural produce. Creating better linkages
between demand and supply also has the potential to improve the price signals that farmers
receive. By eliminating both waste and middlemen also increase the fraction of the final sales
prices that is paid to farmers. An added benefit of improved distribution and warehousing
channels may also come from enhanced exports. Indias experience between 19902010,
particularly in the telecommunications and IT industries, showcases the various benefits of
opening the door to large-scale investments in these sectors. Arguably, it is now the turn of
retail.
REFERENCES:-
Bashkar, E. (13 Jan 2012,1), Job Creation or Destruction? Labour Market Effects of Wal-
Mart Expansion,
Bashkar, E. (8 june2010,1), selling a Cheaper Mousetrap: Wal-Marts Effect on Retail
Bashkar, E. (5 Sept 2008,3), The Causes and Consequences of Wal-Marts growth.
Fukasaku, K., Y. Ma and Q. Yang (1999), Chinas Unfinished Open- Economy
Reforms: Liberalisation of Services, Technical Paper No. 1
Globerman, S. (1979), Foreign Direct Investment and Spillover Efficiency
Benefits in Canadian Manufacturing Industries, Canadian Journal of
Economics, Vol. 7, pp. 42-56.
Journal of Development Economics, Vol. 42, pp. 51-74
Journal of Economic Perspectives, 21, 3, 17798 2011. (Blackwell Publishing Ltd)
Review of Economic Statistics, 87, 1, 17483.
Retail Journal of Urban Economics, 58, 2, 20329.

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